THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
A HOLE IN OUR HOPES

Federal deficit could top $1 trillion

By Michael Kranish
Globe Staff / November 23, 2008
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WASHINGTON - President-elect Barack Obama will enter office in January facing an unprecedented budget deficit that will probably top $1 trillion, more than twice the previous record, further limiting his maneuvering room as he tries to boost the beleaguered economy and follow through on hundreds of billions of dollars worth of campaign promises, according to estimates by congressional officials and budget analysts.

Even as he faces the skyrocketing deficit, Obama is considering a massive stimulus package that is intended to boost the economy but is expected to further increase the deficit by as much as $300 billion.

While the deficit had been expected to rise since the most recent official projection, $421 billion in September, the estimates provided to the Globe by the Senate Budget Committee and independent analysts painted the starkest picture yet of how the nation's financial crisis will affect the start of Obama's presidency.

"A trillion-dollar deficit is not only something you wouldn't have seen in an economic textbook, it is something that even a science fiction writer would not dare mention," said Stan Collender, one of the nation's most re spected budget analysts, who was a budget staffer for both the House and Senate and now works for a Washington corporate communications company.

"What it tells you is that the next four years are going to be four of the roughest fiscal years in the history of the United States."

With Obama expected to formally announce his economic team tomorrow, some analysts are urging him to use the occasion to explain that the exploding deficit has changed the fiscal terrain so dramatically that he must put off tax cuts and other costly programs to focus on putting the nation's financial fundamentals back in order.

"He should say we are facing a trillion-dollar deficit, that this is an emergency situation, it is a different world, and we are going to have to scale back on some of these promises," said Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group.

Yesterday, Obama announced that he has asked his economic team to craft a stimulus plan that would create 2.5 million jobs in the next two years, but he did not say how much the plan would cost or where the money would come from. One possibility is that Obama will take the second half of the already approved $700 billion financial bailout, which has not yet been allocated, for the stimulus plan.

An Obama spokesman declined to comment on the impact of the projected deficit on the president-elect's plans.

Senator Judd Gregg of New Hampshire, the top Republican on the Senate budget panel, said that he expects Obama will face a deficit between $1 trillion and $1.2 trillion, once a stimulus bill is added. The deficit will probably be $1 trillion in the following year, Gregg said. By comparison, the deficit for the fiscal year that ended Sept. 30 was $455 billion, the current record.

Gregg said the problem is being compounded by an enormous drop in government tax revenues, which in recent years had been growing as investors cashed in stock market profits. With few people making money in stocks this year, tax revenues will fall sharply, probably by at least $100 billion.

"The economy is a dropping like a rock and the federal government will feel that very quickly on the revenue side," Gregg said in an interview. "I think it is very hard in the context of a trillion-dollar deficit to add new programs to the books."

To put the dilemma in perspective, Gregg noted how quickly the size of the deficit has grown in relationship to the gross domestic product, the sum of all goods and services produced in the United States. Analysts said the deficit in the last fiscal year was 3.2 percent in relation to the GDP. But with the shrinking economy and the shortfall in tax revenues, that is projected to rise in the current fiscal year to about 8 percent, the highest rate since World War II.

Analysts said that trend deserves scrutiny because the higher the deficit, the more the government must spend on paying interest on the debt, which in turn means less money for new programs or tax cuts - both of which Obama has promised.

If the deficit remains high "over enough years, it leads to a debt explosion" that could devastate the economy for years, said Richard Kogan, a senior fellow at the nonpartisan Center on Budget and Policy Priorities.

Nonetheless, many economists are urging Obama to push a stimulus package that will probably, at least in the short term, further increase the deficit. Obama's advisers have suggested a stimulus package that could range between $100 billion to $300 billion. However, there has been strong disagreement on Capitol Hill about whether the package should be similar to a stimulus bill enacted earlier this year, which resulted in many taxpayers receiving $600 rebate checks, or whether it should focus on a jobs program such as funding infrastructure projects.

Gregg, who opposed the $600 rebate checks, said that program did little to stimulate the economy and resulted in much of the money being spent on goods produced in foreign countries, particularly China. He said he proposed at the time that the money be used to stabilize the housing market, suggesting that might have helped prevent the current financial crisis. Obama has not yet specified what his stimulus program will include, though in his remarks yesterday he spoke of "rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels," along with fuel-efficient cars.

Economists said the goal of the stimulus program would be to create enough growth to eventually offset the cost of the program and, in the long term, reduce the deficit. They said that if the stimulus plan does spur substantial growth, that would help the banks that have borrowed money from the government under the financial bailout plan to repay the loans with interest. That, in turn, would help shrink the deficit if other economic problems are brought under control, the economists said.

But even if Obama is successful in reversing the economic slowdown, he faces another longer-term deficit problem due to the ballooning costs of Social Security and Medicare as baby boomers retire. Obama still hopes to expand healthcare and push through other costly initiatives sought by his supporters.

The deficit received relatively little notice during the campaign. Bill Clinton left his successor, President Bush, with a budget surplus of $128 billion. That quickly turned into a deficit because of a combination of factors, including increased spending, across-the-board income tax cuts, an economic downturn, and some of the costs associated with improving homeland security after the Sept. 11 attacks.

The deficit started declining in 2004, prompting Republicans to say that the tax cuts were stimulating economic growth. But the deficit more than doubled in the last year as the economy slowed and the cost of the wars in Iraq and Afghanistan built up.

In the federal response to the financial crisis, a series of measures have added to the deficit in the last three months, including $105 billion to offset a scheduled increase in the alternative minimum tax and up to $350 billion to pay for the financial bailout (the second half of the $700 billion has not yet been allocated).

Bixby said that while the deficit is a major concern, the bigger problem is that little is being done to ensure the accumulated national debt - $10.6 trillion, the highest in relation to GDP in a half century - is brought under control for the long term.

"We are doing nothing to get ourselves to dig ourselves out of it," Bixby said. "What's the end game? We don't have a responsible economic policy and we are on the verge of the baby boomers retiring, which means that there are going to be enormous budgetary pressures in the next several decades. This is a convergence of bad events."

Michael Kranish can be reached at kranish@globe.com.

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